Thoughts on Technical Analysis (Part 1)

1- Taking market entries at exhaustion figures (accumulations or distributions) is a poor investment if the preceding trends show strength (especially if the trendline hasn't been broken or they are in contradiction with balance points of higher timeframes, like a 20 EMA).

Secure reversals occur in contexts of weakness.

2- Thinking of price charts as something that either goes up or down is a mistake, as markets tend to go through long periods of indecision. We should avoid these circumstances unless a study in higher timeframes provides us with a favorable context.

3- Trades where the Stop Loss (SL) is protected by price formations, (especially if the target shows a good risk-reward ratio) not only add security to our trades but also attract more participants, increasing the chances of success.

4- Forcing market entries (or analysis) implies a lack of experience, system, or investment methodology.

Even discretionary investors express that the best opportunities are evident at first glance.

5- Not being flexible to market changes is often more a matter of ego than inexperience.

6- There is no risk management nor is it possible to perform backtesting without fixed, immutable parameters.

Any minimal change when executing our market entries significantly impacts our success rate.

7- We should avoid analyzing the market starting from lower timeframes, as our analysis might be biased once we approach higher timeframes.

Higher timeframes clarify.

8- We should avoid using several indicators of the same type (oscillators or trend), as the signals will be relatively similar in the same context, which does not provide a significant advantage.

A hundred aligned oscillator crossovers in the same timeframe won't make a difference.

9- The best quantitative trading systems are trained based on historical patterns. Moreover, harmony and repetitive patterns attract more investors.

The root of Technical Analysis is the historical pattern, and a pattern of behavior increases the probability of success.

10- The best market entries are in balance zones, and even reversals in lower timeframe trends (in disequilibrium) generally increase their reliability when they find a balance point in higher timeframes.

11- A engulfing candle is a trend in a lower timeframe, so any formation or pattern can be contextualized.

12- There are two approaches to tackling a price chart: the quantitative and the discretionary (or logical). Both approaches recognize that the market forms patterns with some predictive capacity, but they accept that most of the time randomness prevails.

13- The fathers of Technical Analysis (Charles Dow and Richard W. Schabacker) claim that lower timeframes are more prone to manipulation. Another interesting fact is that documented quantitative systems decrease their success rate at lower timeframes (some becoming unusable at 1-hour or higher timeframes).

14- Major changes in price charts are caused by minorities (who concentrate more wealth and influence) that are better informed and capitalized.

Notes:

Some classic authors taught how periods of great popular euphoria generate market corrections, as in the case of Charles Dow; while others directly created methods to understand and exploit manipulation, like Richard D. Wyckoff and his "strong hands".
The popular euphoria generated by the news that the SEC would allow the creation of the first Bitcoin ETFs, and BlackRock's entry into the Bitcoin ETF market did not cause the expected rise, but a correction. Also, Donald Trump's rise to power and encouraging news generated popular euphoria which translated into another correction. Currently, many stocks, especially tech ones, are at inflection points according to the historical record of price action, some showing exhaustion figures. It wouldn't surprise me if a series of "geopolitical circumstances" justified the corrections.


15- Colorful charts increase the irrationality and risk appetite of investors (and investment platforms know this).

Notes:

Investors in feudal Japan used red and black to represent price fluctuations. Bullish candles were red, and bearish ones were black. With the red color, investors remained alert and skeptical about gains, and black was a neutral color meant to convey calm in the face of trend reversals.
Libraries, offices, universities, and any place where maximum intellectual performance is required are decorated with neutral colors. Recreational places like bars, clubs, or casinos are extremely colorful.